It is often said that well paid members of the public sector have “Rolls Royce” pensions. We often get asked by our private only medical consultants,
“How much do I need to put into a pension to at least receive the same pension as I would if I was on a B* or a C contract?”
To answer this question for our clients, we model out their projected HSE pension at retirement and then work back to calculate the contributions needed in order to match the HSE pension benefits. It is important to note that we do have to use some reasonable assumptions for investment growth rates etc. Let’s take an example of a private consultant who wishes to receive the same pension at retirement as their peer on a C contract. The C contract consultant has the following:
- Consultant aged 44 with a retirement age of 65
- C contract paying €167,000 today (assume €253,000 to age 65– growth of 2%).
- Receives up to a maximum of 5 professional added years at retirement.
- Accrued 10 years of service to date
- Therefore, net pensionable salary would be €227,000.
Given the assumptions above, the consultant on a C contract will be paying the following each year towards their pension:
- Pension contributions €9,952
- Additional superannuation contribution €4,594
The consultant will receive tax relief on the pension contributions but not on the ASC which is effectively a pension levy. As their salary increases over time, the amount that is paid through contributions also increases.
At retirement this consultant could expect the following:
- Annual Pension: €102,000
- Lump Sum: €342,000
They would also receive the State Pension in addition to the above. The maximum State Pension is currently €12,900. A fully private consultant will also receive the State Pension.
Funding a private pension/investment account to match these benefits
In order to be able to fund an annual pension of €102,000 over 30 years in retirement that is index linked (increases in line with the 2% inflation rate), you would need to accrue a fund of €2.3m by age 65. This is based on an investment return of 4%.
- This would entail a pension contribution of roughly €5,800 per month during the accumulation phase.
- When tax relief is taken into account (effective 52% tax relief on pension contributions if paid via a corporate), the net cost would be roughly €2,800 per month.
This is circa an increase in net (after tax) pension contributions of €1,920 in excess of what is being currently paid by the consultant on a C contract.
This approach needs to be tailored to the specific needs of the consultant to include the HSE pensions that were accrued during previous service with the HSE (we verify these with the HSE on our client’s behalf). Currently the maximum fund allowable in a pension in Ireland is €2m. Pension funds in excess of €2m will be taxed twice. Therefore, a small section of this funding would potentially need to be diverted to an investment account. Finally, it is vitally important that private pensions are invested appropriately and fit for purpose. For example, if the net investment return was increased from 4% to 5% over the timeframe, this would increase the value of assets at retirement by €300,000.
If you were looking to do this calculation yourself, the following factors need to be taken into account:
- Value of accrued HSE benefits. This is a calculation that is done in line HSE pension rules.
- Use of reasonable growth assumptions to ensure there is no overfunding of the pension.
- Ongoing review to ensure management of pension fund threshold.
This is just a quick example to demonstrate the funding that would be needed to match a HSE pension. The pension will also be contingent on other specific factors such as retirement date, expected expenditure in retirement and ability/willingness to take investment risk.
We have also written 3 white papers related to pension/financial planning for Medical Consultants.
- White Paper for Medical Consultants with Public and Private Income
- White Paper for Medical Consultants employed after 1st October 2012
- White Paper for Private-Only Medical Consultants
Please contact me at firstname.lastname@example.org and I will send you on a copy.